The Referendum on Separation for Scotland: Scotland's Membership of the EU - Scottish Affairs Committee Contents


Appendix 1: Correspondence from Rt Hon David Lidington


Letter from Rt Hon David Lidington, Minister of State for Europe, 30 April 2014

EVIDENCE SESSION ON THE EU AND INTERNATIONAL ISSUES RAISED BY THE SCOTLAND REFERENDUM: FOLLOW UP

Thank you for the opportunity to appear before your Committee to outline the FCO's paper on the EU and international issues raised by the referendum on Scottish independence. Your Committee has taken on an important role in relation to this subject, and I am sure you will continue to make an influential contribution to the debate as we approach the vote in September.

I promised to write on the financial impact of independence on aspects of the Scottish economy and the ability of an independent Scotland to maintain the opt-outs and derogations currently enjoyed by the UK.

EU Budget

On the financial impact of independence, you asked for clarity on the losses to Scottish agriculture that could occur if there were to be a gap between leaving the UK and joining the EU. In the short term, if an independent Scottish state did not become a Member State immediately after becoming independent of the UK, then CAP receipts would be interrupted. Any continuation of existing levels of support to farmers would require funding from a Scottish national budget; somewhere between €550 million and €600 million per year (2011 prices), depending on the year in question. These numbers reflect the level of UK CAP receipts allocated to Scotland for the period 2014-2020, which has been set at €3.6 billion for Pillar 1 receipts.

You also asked for more detail on how certain figures were arrived at. I thought it would be most helpful to explain the various elements that are factored in to the Government's analysis.

The accession date for an independent Scottish state is uncertain. So, to illustrate the effect of independence from an EU budget perspective, the impacts have been analysed over the course of 2014-20. If Scotland's share of North Sea oil revenue is determined on a geographical basis, and assuming that an independent Scottish state was a member of the EU from 2014, the analysis presented in the FCO's January 2014 paper gives the following results.

The rebate: Without a budgetary correction, there would be a total additional direct cost to Scottish taxpayers of around €2.9 billion (€1,100 per household). This figure consists of the loss of the benefit from the UK rebate (€2.3 billion), with the rest (about €640 million) arising from the Scottish contribution to the UK rebate.

Receipts - uncertainties around the CAP: An independent Scottish state's receipts from the EU budget are uncertain and would depend on the terms of accession, which would have to be agreed by all 28 Member States. In particular, it is unclear whether CAP receipts would transit from current levels to €196 per hectare by 2020, or whether, in common with all 13 Member States that have joined the EU since 2004, full treatment in respect of CAP receipts would be phased in over ten years. The analysis therefore presents CAP receipts, total receipts and net contributions for an independent Scottish state as a range of numbers, reflecting both of these scenarios, and all possibilities in between, which might potentially be negotiated. Following the decision to allocate Scotland €3.6 billion in CAP Pillar 1 receipts for 2014-20, an independent Scottish state's CAP Pillar 1 receipts could range from around €1.2 billion less to around €950 million higher over 2014-20.

Net contributions: However, the total impact of different levels of receipts is dwarfed by the impact of losing the benefit of the UK rebate. In short, even under the most optimistic scenario for CAP receipts, an independent Scottish state's net contribution would be around €2.2 billion (€840 per household) worse than it would be if Scotland were to remain part of the UK. Under less optimistic scenarios, an independent Scottish state could see its CAP (and total) receipts fall substantially, with the deterioration in net contributions over 2014-20 rising to as much as €4.3 billion (€1,650 per household) compared with the situation if Scotland were to remain part of the UK.

All of these euro figures are expressed in terms of 2011 prices. So, as noted above, under the most optimistic scenario for CAP receipts, an independent Scottish state's net contribution would be around €840 (2011 prices) worse per household than it would be if Scotland were to remain as part of the EU. The Chief Secretary noted at the launch of the paper in January that this would be around £750 (this figure is expressed in 2014 prices). Under the worst case scenario in respect of CAP receipts, the additional net cost per Scottish household would be almost double that.

Derogations and Opt-Outs

We discussed the question of specific opt-outs. I confirmed that the UK government would have no problem, in principle, with an independent Scotland attempting to negotiate opt-outs and derogations.

However, I also indicated that all other Member States would have to agree to allow such variable geometry in Scotland's case.

As promised to your committee, the list of opt-outs and derogations that are written into the treaties and protocols is as follows:

·  Protocol 15: The single currency opt-out. This recognises that the UK is under no Treaty obligation to adopt the single currency and that a separate decision to do so would be required by the UK government and parliament. This protocol also establishes procedures to enable the UK to opt in to the single currency.

·  Protocol 19: The Schengen opt-out. This provides for the UK (and Irish) opt-out from elements of Schengen, and provides for the UK (and Irish) opt-in to some parts of the Schengen acquis, or measures building on these parts, on a case-by-case basis and by unanimity.

·  Protocol 20: The opt-out from the prohibition of internal border controls. This authorises the UK to maintain border controls on persons seeking to enter the UK from other Member States. The protocol allows the UK and Ireland to maintain the Common Travel Area. It also allows other Member States to impose equivalent border controls on persons entering their territories from the UK and Ireland.

·  Protocol 21: The JHA opt-in. This protocol provides for the UK's (and Ireland's) non-participation in justice and home affairs measures and establishes procedures to enable the UK (and Ireland) to opt in to those measures in which it does wish to participate, either during negotiation or after the adoption of those measures.

·  Protocol 36: The JHA opt-out. This protocol sets out transitional provisions for third-pillar justice and home affairs measures adopted prior to the Lisbon Treaty, making these measures subject to CJEU jurisdiction and Commission infraction powers. The protocol allows the UK to opt out from these measures en masse.

There are also a number of derogations from customs and excise rules, most noticeably on VAT. You asked for more information on VAT derogations enjoyed by the UK, and on whether newly acceding Member States have been able to obtain similar conditions.

Zero rates of VAT for items such as food and children's clothing apply to Scotland as part of the UK. These zero rates are specific to the UK and are maintained under long-standing EU agreements - they are not available to all Member States under the VAT Directive. Whether an independent Scotland would be able to secure similar derogations from the VAT Directive, which stipulates a minimum reduced rate of VAT of 5% for certain products and services, and a minimum standard rate of 15% elsewhere, would be a matter for negotiation between the government of an independent Scotland, and the EU and its Member States. An independent Scotland would also need to secure a derogation to continue with the existing reduced rate of VAT for domestic fuel and power.

Some Member States that have recently acceded to the EU, such as Malta, have secured zero rates of VAT for certain items, such as food. In terms of the Member States which have joined since 2004, none has secured zero rates on as wide a range of goods and services as the UK. Further details on VAT rates and special conditions applied in the EU can be accessed at:

http://ec.europa.eu/taxation_customs/resources/documents/taxation/vat/how_vat_works/rates/vat_rates_en.pdf.

As I made clear in the evidence session, derogations may also be written into pieces of EU legislation. An example of such a derogation appears in the Working Time Directive - any Member State may opt out from the 48-hour per week limit. The UK has done this.

Further points

I would like to clarify the timescales involved in Croatian accession. I stated in the evidence session that the Croatian accession negotiations lasted around six years. This refers only to the period between October 2005 and June 2011 during which screening and negotiations on accession chapters took place. The wider accession process takes significantly longer; eight years passed between the opening of negotiations to the moment of accession, while the entire process, from the point of Croatia submitting its application to the moment of accession, took ten years.

During the evidence session I stated that a separate EU Member State would require a financial regulatory authority and a central bank of its own. Although a financial regulatory authority is required, a central bank of its own is not. Additionally, I indicated that the Scottish contribution to the UK rebate would be around £1.9 billion over the period from 2014-2020. I would like to clarify that this figure in fact refers to the additional net contribution to the entire EU budget that an independent Scotland would have to make compared to its net contribution as part of the UK over the same period. As stated above, the Scottish contribution to the UK rebate is estimated at around €640 million over the period 2014-2020.


 
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